Banking News

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Bank of England cuts base rate to 5%

10 April 2008 / by Joy Tibbs

The Bank of England's Monetary Policy Committee (MPC) has cut interest rates by 0.25 per cent to five per cent in order to prevent a slowdown in economic growth.

The MPC has cut rates three times since December, when the base rate was 5.75 per cent. The impact of the global credit crunch, and particularly turmoil within the housing market, are likely to have prompted the decision.

Representatives from both Lloyds TSB and Abbey believe the decision must have been a tricky one for the MPC as economic conditions look set to deteriorate. "This decision must have been one of the toughest the Monetary Policy Committee has faced for a while," says Trevor Williams, chief economist for Lloyds TSB Corporate Markets, speaking about the choice between cutting rates and stemming inflation.

"If the MPC had kept rates on hold, it would have left the economy exposed to a slowdown." he continued, "But by cutting rates, it has left inflation free to rise even further beyond its target."

Chief economist at Abbey, Barry Naisbitt, says: "Slowing economic growth, particularly shown by survey indicators of output, and a weaker housing market will have played a part in the decision. The reduction should help to bolster consumer confidence at a time of continued uncertainty."

On paper, the decision should help to ease pressure on those struggling with mortgage repayments. Nationwide has already committed to lowering its base mortgage rate (BMR) from May 1. Its BMR will fall from 6.74 per cent to 6.49 per cent and tracker rates will also fall 0.25 per cent. However, mortgage lenders are not legally obliged to alter mortgage rates in line with the base rate, so not everyone will benefit from the decision.

Director of mortgages at Legal and General, Ben Thompson, says: "Despite today's cut, the impact on borrowers will be minimal. Current credit conditions have resulted in more tiered pricing for mortgages which means that anyone with less than a 25 per cent deposit is facing a higher rate than they would have done over the past six months.

"Whilst lenders actively make it more difficult and more expensive to take out a mortgage, the ripple effect on fixed rates resulting from a change in the base rate is limited. In fact, fixed rates are more in line with LIBOR, the inter-bank lending rate, which remains three quarters of a percent above base rate."

Director general at the Council of Mortgage Lenders (CML), Michael Coogan, says that the cut is "good news" for customers of tracker mortgages. However, he adds that the CML “Would like to see another base rate cut next month partnered with more liquidity auctions, of higher amounts, over longer terms, and available to a wider range of institutions. This coordinated approach would help to show the authorities are serious about tackling the market problems."